Is it time to switch your RA?
It’s a well-established truth that constantly switching portfolios will harm your long-term investment outcomes. But what if your retirement annuity (RA) has underperformed for the past five or even ten years?
Roanleigh Thambiran, Head of Business Development at Cannon Asset Managers, notes that one of your primary concerns in deciding whether to move your RA should be to examine the impact that high fees might be having on your investment results.
“Fund performance is usually reported net of fees, and often when your funds appear to have performed badly, it might be the result of excessive fees eating into returns rather than a reflection of the performance or growth of the portfolio’s underlying assets,” she says.
“It stands to reason that a portfolio that utilises the same investment benchmark and is invested in similar asset classes, but charges lower fees, has a far greater chance of achieving the targeted returns and has a higher likelihood of helping you to reach your investment goals – even if you pay penalty fees or early termination charges to move from a higher-cost solution to a lower-cost solution.”
To demonstrate the benefit of lower fees on investment outcomes, Thambiran offers an example drawn from a real-world scenario of a 45-year old investor who currently holds R550,000 in their retirement annuity, and is choosing whether to switch portfolios.
The investor’s current portfolio, the Old School Portfolio, targets average returns of 10% per annum before fees, and charges investment fees totalling 6% per annum (yes, really). The alternative investment, the New School Portfolio, also targets 10% per annum, but only charges 1.2% in fees.
If the investor moves their funds to the New School Portfolio, they would pay a penalty of R40,000 from their R550,0000 retirement capital, which would leave them with an initial lump-sum of just R510,000 instead.
If both portfolios achieve their performance targets, the 4.8% reduction in annual investment fees means that despite having paid the penalty charges, the New School Portfolio would outgrow the Old School Portfolio by over R38,000 within three years.
In ten years, the New School Portfolio would have outperformed the Old School Portfolio by more than R371,000.
And by the time of the investor’s retirement at 65 years, the New School Portfolio would be worth R2.75 million – more than double the result of the Old School Portfolio, which would have achieved just R1.2 million.
“Many investors are so afraid of the impact of penalty charges that they leave their savings in expensive underperforming portfolios, without realising just how powerful the benefit of a reduction in fees can be over time,” notes Thambiran.
“It can prove valuable for investors to shop around and ask questions about their fee structures and charges. And if you need any help in comparing different portfolios or understanding what the effects of different fees would be on your investment outlook, feel free to ask a professional financial advisor for their assistance.”
Other key points before you switch
Before you switch, however, there are a few other key points you need to factor in before making your decision, namely: